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Archive for the ‘Money Market Funds’ Category

I decided to kick off the Investing Options Series by highlighting Money Market Funds. There’s really no rhyme or reason behind it except that the next installment will be about Money Market Accounts and highlighting the difference between the two savings options.

What Are They?

A Money Market Fund (not to be confused with a Money Market Deposit Account) is a type of mutual fund that maintains its value by purchasing short-term investments (maturing in less than one year) such as Treasury bills, short-term certificates of deposit (CDs), and short-term commercial debt. Money Market Funds are required by law to provide a safe and liquid investment while at the same time providing returns slightly higher than a run-of-the-mill passbook savings account. Money Market Funds are becoming increasingly popular and more widely available every year. Even PayPal has a Money Market Fund! In fact, at the end of 2003, money market mutual funds had nearly $2.3 trillion in assets, or 36% of the $6.39 trillion invested in all mutual funds, according to the Investment Company Institute (ICI), an industry group that represents mutual fund companies.

What is the Investment Strategy?

As mentioned above, Money Market Funds’ main strategy is to preserve your invested principal by keeping the net asset value (NAV or share price) around $1. Although Money Market Funds are not insured by the FDIC, no retailer has ever lost money in a Money Market Fund – which has made Money Market Funds infamous for low-risk investing. In fact, there has been just one case of a money market fund “breaking-the-buck,” or dropping below its $1.00 share price. In 1994 an institutional money fund, Community Bankers U.S. Government Money Market Fund, liquidated at 94 cents a share due to extensive derivatives-related holdings.

Different Flavors

There are a number of different Money Market Funds mainly based on the type of short-term investments that are used as well as the amount of the fund that is used to invest in “illiquid” assets in order to try and earn a larger dividend. There are portfolios, for example, that only invest in T-bills or only invest in CDs and there are even state-specific portfolios. The type of underlying investment might not seem very important, but it impacts the yield percentage as well as the taxability of the fund.

Taxable Money Market Funds invest in securities whose income is not exempt from federal income taxes, including funds that invest principally in Treasury securities. Tax-exempt money market funds invest in short-term securities whose income is exempt from federal income taxes, such as bonds issued by state governments and municipalities. The yield on tax-free funds is normally lower than the yield on taxable fund which means that those in upper-income tax brackets will benefit the most from those tax-free funds. If you’re thinking about a tax-free fund take a look at your tax bracket, the state your in, and monitor the yields that are often more volatile in the tax-free funds.

In order to calculate the taxable-equivalent yield:
Subtract your federal income tax rate from 100. For example, if you are in the 25% income tax bracket, the difference is 75. This figure is also called your reciprocal-of-tax-bracket. Divide the tax-exempt fund’s yield by your reciprocal-of-tax-bracket. If the yield on a tax-exempt fund is 1.8% and your reciprocal-of-tax-bracket is 75, the taxable-equivalent yield is 2.4%.

In other words, you would have to earn a yield of at least 2.4% on a taxable money market fund to make the taxable fund more attractive than the tax-exempt fund.

If your tax-exempt fund is also exempt from state income taxes, subtract your combined income tax rate from 100. For example, if your federal and state income tax rates sum up to 40% of income, your combined reciprocal-of-tax-bracket is 60.

Using the same formula, a 1.8% yield on the current tax-exempt fund has a combined taxable-equivalent yield of 3%.

Short or Long-Term Investment?

Definitely short-term! Money Market Funds are designed to be highly liquid – meaning that you could cash out in a matter of days. In fact, many investment firms allow you to write checks from your Money Market Fund or withdraw cash from an ATM.

Potential Risk

Since Money Market Funds are managed in such a way as to minimize risk, the biggest risk involved in investing in Money Market Funds is the risk that inflation will outpace the funds’ returns, thereby eroding the purchasing power of the investor’s money. Fidelity also mentions that the price of a Money Market Fund could decrease due to a decline in the credit quality of an issuer (i.e. The U.S. Government can no longer honor T-bills). And, as mentioned previously, a Money Market Fund is not a deposit at a bank and is therefore not insured by the FDIC.

Potential Return

Money market funds have an average return of 4 to 6 percent a year – rivaling your savings account and even most short-term CDs. PayPal’s Money Market Fund, which they claim is the country’s highest yielding, had a 7-day average yield of 4.73% as of the date of this post. The interest of a Money Market Fund is calculated daily, but only paid out at the end of the month unless you sell the fund, then it is paid at that time. The graph below shows an example of returns from the PayPal Money Market Fund which sweeps the leftover PayPal funds of investors into a larger Money Market Fund.

These returns can be compared to the U.S. Treasury bill return over the past few years:

BankRate.com provides current Money Market Fund yields as well as graphs such as this one showing the yield comparison of the different flavors of Money Market Funds.

Who is this a Good Investment For?

In short, Money Market Funds are great for individuals looking for a safe and liquid short-term investment. Money market mutual funds are often used by people with brokerage accounts as a short-term holding place for money that’s waiting to be invested in stocks, bonds or mutual funds. However, you must be aware of the expense ratio so that your interest revenue is not swept away from your brokerage firm.

If you’re looking to invest some cash for the short-term, Money Market Funds are an available option – but they are not the best option for most individual investors mainly due to the fact that other investment vehicles (CDs and Money Market Accounts) provide the same liquidity and safety while providing higher returns.

Do you have excess cash and don’t know what to do about it? Well, why don’t you invest it? If you will just use the money for something else like taking a shopping spree, you’ll be losing the opportunity to generate more cash. It’s better to look ahead for the future than just live for today. One way of assuring for a brighter future is by making investments. However, there are different kinds of investment vehicles available. If you’re a newbie in the field, I advise you to invest in money market mutual funds. Actually, putting your money in mutual funds is the best thing you should do.

Mutual funds are the most appropriate investment for amateurs. The main objective in making investments is to make big returns. It’s a means of reaching a healthy financial life. There are people who became financially successful just because they made wise investments. If they can do it, why don’t you do it, too? You can start by making even a small investment. So why would you choose money market mutual funds over others? First, investing in mutual funds doesn’t require huge capital outlay. You can open an account with just $500 in hand. Isn’t it great? Unlike other investments which you need to have big capital like in stocks, bonds and other types of mutual funds.

You don’t even need a financial adviser regarding your investment for the risk involved here is lower. You won’t be worrying much whether you will incur any losses. Instead of putting your money in savings account in a bank, try investing it in the said fund. Actually, it’s like putting your cash in a savings account but the benefits are more. Savings account have lower rate of return. Mostly, banks only give a return of about 1% while money market mutual funds have an average return of 4.5 %. The rate of return can make a huge difference. After how many years, you can earn big profits if you will invest in the said fund.

After the fund has accumulated big profits, you can start thinking about going into bigger investments. With a bigger capital in hand, you can invest in stocks if you want too. The only concern in stocks is the law of leverage. If you will be lucky enough, it can really be profitable. But you can also suffer big losses if you will be unlucky. That’s why before you go make some investment decisions; you should make some thorough research on where you want to invest. Another thing about money market mutual funds is in terms of liquidity. You can easily take back the money you invested if you want to.

In times of emergency, you can always remove it and use in whatever purpose you intend. Not like some other investments where you can’t easily pull out your money. The liquidity feature of the money market mutual funds has attracted some investors. Investing in the said fund is becoming popular because you will not only generate profits but it’s considered a kind of safe investment too. So better run to a local bank and invest immediately!

The best bond funds and best stock funds have two things in common. One thing could be excellent investment performance, since you invest money in stock funds to get growth and in bond funds for higher income or dividends. Then again, investing is rarely that simple.

Past performance figures are readily available. That’s the good news. The bad news is that past performance is not a good predictor of future performance for mutual funds in general. And future performance is what you invest money to get.

Last year’s best performing stock funds can be losers when economic or market conditions change, and change is the norm. Bond funds that pay the highest dividends take risks that many investors are not even aware of. For example, high yield funds invest in low-quality bonds and are often referred to as “junk” bond funds in the business.

So, what two factors can you get your arms around when looking for the best funds to invest money in? First, look at the reputation and track record of the investment company or mutual fund family that offers and manages a fund. They should be well-established and offer a broad array of funds to choose from. Every fund should tell you when it was established in its literature.

Ask for free information. Get a guide to all the funds a mutual fund company offers. There should be numerous stock funds and bond funds to choose from. Plus, some balanced funds and money market funds as well. Some funds should be well established, while others might be but a few years old. Their largest funds should manage well over $1 billion in assets. You’re looking for stability and a track record here before you invest money.

While you have the mutual fund info in front of you, move on and look for the second thing you need to know to pick the best stock funds and best bond funds. Every fund must show you what it will cost if you invest money. You can’t predict future performance, but you sure as the devil can get a handle on sales charges, fees and expenses.

These numbers are laid right out for you if you look. For example, one stock fund might have sales charges of 5% that comes right off the top when you invest money. Plus, yearly expenses and other fees could nail you for 2% a year. Another might have no sales charges at all, and have total expenses of less than 1%.

Don’t throw your money away. High charges, fees and expenses are NO indication of quality. The best funds in the country offer low-cost investing and a good track record for reputation and integrity.

When it comes to investing your money, you’ll probably know by now that you have numerous options to choose from.

In fact, it can feel like a bit of a minefield and sometimes you may not know if you’ve made the right choice.

Should you choose a bond fund, equity fund, property fund or a money market cash fund? Or any other type of fund?

So, what is a Money Market fund?

They are essentially unit trusts that aim to provide investors with an income from risk-free, short-term cash and cash-like holdings.

Some investors have been selling their share funds and have opted for security by pouring millions into these types of funds. In our experience, this type of investor will tend not to have a proper risk assessed portfolio, rather a collection of disparate investments, and may be doing it all themselves.

The money manager of their choice will place this money into bank deposits, certificates of deposit*, very short-term fixed interest securities and floating rate notes**.

Most Money Market funds require relatively low minimum investments – typically around

The Merrill Lynch money market rates and the Goldman Sachs rolled and topped over as they are written on the 5th May in the early afternoon. As it has been viewed from the Candlesticks technical analysis of the Japanese the journal cost chart of the Merrill Lynch money market rates exhibits the price action of the shares for the December 2006 and January and February 2007.
The Merrill Lynch market rates reveals to the three bar pattern of the evening star in which the centre bar is considered as the shooting star. This is termed as the configuration which is very much bearish. From the regular high of the 98.68 in the January 2007 the Merrill Lynch money market rates decline to the 78.76 in the month of the February of the same year, than it was recovered in the May when it reaches up at the height of the 95.00.

In the Merrill Lynch money market rates the price bar sometimes remains vibrant to the shooting star which is considered as the bearish. Recently the closing costs of the Merrill Lynch money market rates were lower than the opening price.

The Merrill Lynch money market rates are usually the indicators of the reliable and also provide the suggestion to the price in each of the issue and can also process the topping after confirming the reading of the Candlestick. The Merrill Lynch is coveted with the code of trading for the direct buying and selling of the shares.

This is a thin market and is also volatile. This market raises approximately 70% in the previous part of year and in the second half its value decreases 30%. The attractions of the investors are thus very clear. There is certainly the risk that changes the effort of the corruption and the falters and thus continues to challenge the persistent committed company. The market also offers the charming valuation as to the Merrill Lynch with the EPS growth of the 20 to 40%, multiples of the PE of 8x -10x and the yields of the dividends that ranges to the 3 to 10%.

For every person who desire for have the best there are only few of the investors. The main point which was made in the year 2007 in the month of the January is that the flags of the red Candlesticks are flying to provide the respect to the shares of the Merrill Lynch. With the respect of the observation the mirror of the Merrill Lynch is identical and was made in the previous articles with the certain respects for bearing the Stearns.

Business money market accounts are investment tools that give companies easy access to their funds while offering a very reasonable rate of return. But this is not the only benefit of taking this investing route. Let’s look at a few others:

Tiered Account Rates – Many banks offer the benefit of tiered account rates, which means the more cash you place in your account, the higher your interest rate will be. So as you add to your balance, you will be able to take advantage of a higher rate of return.

Liquidity/Check-Writing Privileges – Another benefit of using business money market accounts as one of your company’s investment tools is taking advantage of a liquid account. You will likely always have access to your funds, which would be available through your check-writing privileges.

No Minimum Transaction Amount – As a promotional tool, most financial institutions require no minimum transaction amount for your account. This definitely helps in cutting down your fees, making investing that much easier.

The above benefits are good reasons to take on an account for your company. But before you dive in, be sure to consider the following:

• Possible limitations. There may be some limitations on the number of transactions you can make a month with some business money market accounts. For instance, you may not be able to make over 6 withdrawals without being penalized.

• Fees/Minimum amount required. Some institutions may implement a minimum amount that is required to remain in your account at all times. For many, this amount is $5,000. If you fall below it, you may be accessed a monthly service fee.

With many other investment tools available for companies, business money market accounts are just one of the ways you can gain returns on your funds. But because they are so liquid and offer many of the privileges of a bank account, you can benefit well from making this one of the ways you choose to invest for your company.